M&A Consideration Issues – What’s the difference between being paid in stock and stock options? (Pt. 2)

In the first installment, I hired a few of the primary differences between receiving stock vs. stock options as consideration for the sale of a company in a M&A transaction. In this installment, I’ll highlight a few advantages of each.

One of the main advantages of receiving stock as consideration in a M&A transaction is that the seller becomes a part owner of the buyer, which can provide benefits such as potential future stock price appreciation, the ability to participate in the buyer’s growth, and perhaps participate in the buyer’s operation and decision-making. However, this also means that the seller is subject to the risks associated with the buyer’s stock, including market volatility and potential fluctuations in the company’s performance.

Stock options, on the other hand, as I mentioned in the previous installment, provide the seller with the right to purchase stock at a fixed price within a specified period of time. This can be advantageous if the buyer’s stock price increases significantly, as the seller can exercise the option and purchase the stock at a lower price, then sell it at the higher market price. However, if the stock price does not increase, the options may expire worthless, resulting in no gain for the seller. Additionally, stock option rights to not provide the seller with any control or decision-making ability unless and until the stock is purchased AND the buyer’s governing documents provide for some level of shareholder control or management rights.

In conclusion, while both stock and stock options can be offered as consideration in an M&A transaction, they have distinct differences and advantages/disadvantages. So which one is better? You probably won’t like my answer. The choice between the two ultimately depends on the goals and preferences of the seller. As I typically inform my clients, while M&A deals may be mechanically similar, each client’s business and goals are unique.

If you have a business that you’re interested in buying or selling, reach out to me – I’d be happy to discuss your potential transaction.